Federal and state governments spent $389 billion on Medicaid in 2010, according to the Kaiser Family Foundation.[*] Medicaid is the largest expense in most state budgets — and it is growing at unsustainable rates. For instance:

According to the federal Centers for Medicare and Medicaid Services, state and local governments’ Medicaid spending was only $84 billion in 2000,62 but as of January 2011, was projected to reach $357 billion by 2020[†] — a quadrupling (in nominal terms) in just two decades, in part as a result of the anticipated Medicaid expansion.

Similarly, federal spending on Medicaid was about one-quarter of a trillion dollars in 2009, but was projected to reach $574 billion in 2020[63] — more than doubling (in nominal terms) in just a little over a decade.

The primary reason behind the rapid growth in Medicaid expenditure is that the federal government encourages states to spend by providing a federal matching rate for all state spending on approved Medicaid services. In economic terms, this is referred to as subsidizing at the margin — for instance, each marginal dollar of pre-ACA Medicaid spending costs New York state just 50 cents, Florida just 42 cents and Mississippi just 27 cents, according to 2011 federal government calculations for fiscal 2013.[64] The federal medical assistance percentage contribution of nearly 66 cents coupled with Michigan’s share of spending (about 34 cents) encourages unnecessary Medicaid spending.[65] If the federal government is paying 66 cents of each dollar Michigan spends on its Medicaid program, program administrators have only a fraction of the incentive to root out waste, fraud and abuse that they would if the state had to pay for the entire Medicaid dollar itself.

This situation will only grow worse as the federal government pays 90 cents or more of each new Medicaid dollar from 2014 to 2020. States will be tempted to apply for the matching funds even when they doubt the value of the spending.

[†] “National Health Expenditure Projections 2010-2020,” (Centers for Medicare & Medicaid Services, 2011), 21, Table 16, http://goo.gl/fvsTs (accessed June 7, 2012). A later edition of this report has been published, but appears to be based on the same general assumptions and makes only minor changes to the numbers in the previous report. “National Health Expenditure Projections 2011-2021,” (Centers for Medicare & Medicaid Services, 2012), 22, Table 16, http://goo.gl/AWjuN (accessed June 7, 2012).